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27 Apr 2012

Norwegian telecom major Telenor
is looking forward to new telecom partner in India.
However, till now Telenor has not disclosed the name of its potential
partner(s), directors, key personnel, etc. Even in its application to
Foreign Investment Promotion Board (FIPB), Telenor has not disclosed
the name of its partners and other crucial details.

For instance, while approving the
investment
proposals, FIPB shall take note that investment is not coming from
countries of concern and/or unfriendly entities. Further, telecom
service providers, ISPs and telecom infrastructure providers must
comply with licensing and security requirements notified by the
Department of Telecommunications for all services in order to make
FDI in India.

The Chief Officer In-charge of
technical network
operations and the Chief Security Officer should be a resident Indian
citizen. The officers/officials of the licensee companies dealing
with the lawful interception of messages will be resident Indian
citizens. The majority Directors on the Board of the company shall be
Indian citizens. FDI shall be subject to laws
of India and not the laws of the foreign
country/countries.

The positions of the Chairman, Managing
Director,
Chief Executive Officer (CEO) and/or Chief Financial Officer (CFO),
if held by foreign nationals, would require to be security vetted by
Ministry of Home Affairs (MHA). Security vetting shall be required
periodically on yearly basis. In case something adverse is found
during the security vetting, the direction of MHA shall be binding on
the licensee.

It seems Telenor failed to satisfy many
of these
requirements. As a result, its application to establish a new joint
venture was rejected by FIPB labeling it as pre mature. FIPB believes
that the said proposal is pre-mature as crucial details pertaining to
the investee company; specific Telenor entity through which FDI would
be routed; details of the Indian partner; the quantum of FDI
envisaged, etc are missing. FIPB would not process the application
till all missing information and details are provided by Telenor.

FDI in Non-Banking Finance Companies
(NBFC) is
allowed up to 100% under the automatic route in only the following
activities:

(i) Merchant Banking

(ii) Under Writing

(iii) Portfolio Management Services

(iv) Investment Advisory Services

(v) Financial Consultancy

(vi) Stock Broking

(vii) Asset Management

(viii) Venture Capital

(ix) Custodian Services

(x) Factoring

(xi) Credit Rating Agencies

(xii) Leasing & Finance

(xiii) Housing Finance

(xiv) Forex Broking

(xv) Credit Card Business

(xvi) Money Changing Business

(xvii) Micro Credit

(xviii) Rural Credit

The other conditions in this regard are:

(1) Investment would be subject to the following minimum
capitalisation norms:

(i) US $0.5 million for foreign capital up to 51% to be
brought
upfront

(ii) US $ 5 million for foreign capital
more than
51% and up to 75% to be brought upfront

(iii) US $ 50 million for foreign capital more than 75% out of
which US$ 7.5 million to be brought upfront and the balance in 24
months.

(iv) 100% foreign owned NBFCs with a
minimum
capitalisation of US$ 50 million can set up step down subsidiaries
for specific NBFC activities, without any restriction on the number
of operating subsidiaries and without bringing in additional capital.
The minimum capitalization condition shall not apply to downstream
subsidiaries.

(v) Joint Venture operating NBFCs that
have 75% or
less than 75% foreign investment can also set up subsidiaries for
undertaking other NBFC activities, subject to the subsidiaries also
complying with the applicable minimum capitalisation norm mentioned
in (i), (ii) and (iii) above and (vi) below.

(vi) Non- Fund based activities : US $0.5 million to be
brought
upfront for all permitted non-fund based NBFCs irrespective of the
level of foreign investment subject to the following condition:

It would not be permissible for such a
company to
set up any subsidiary for any other activity, nor it can participate
in any equity of an NBFC holding/operating company.

The following activities would be
classified as
Non-Fund Based activities:

FDI in Infrastructure Company in the
Securities
Market, namely, stock exchanges, depositories and clearing
corporations, in compliance with SEBI Regulations, is allowed up to
49% (FDI & FII) [FDI limit of 26 per cent and an FII limit of
23
per cent of the paid-up capital] through government approval route.

Further, FII can invest only through purchases in the
secondary
market.

(2) Foreign investment is permitted
under the
Government route, subject to regulatory clearance from RBI.

(3) Investment by a registered FII
under the
Portfolio Investment Scheme would be permitted up to 24% only in the
CICs listed at the Stock Exchanges, within the overall limit of 49%
for foreign investment.

(4) Such FII investment would be permitted subject to the
conditions that:

(a) No single entity should directly or indirectly hold more
than
10% equity.

(b) Any acquisition in excess of 1% will have to be reported
to
RBI as a mandatory requirement; and

(c) FIIs investing in CICs shall not
seek a
representation on the Board of Directors based upon their
shareholding.

(1) Futures trading in commodities are
regulated
under the Forward Contracts (Regulation) Act, 1952. Commodity
Exchanges, like Stock Exchanges, are infrastructure companies in the
commodity futures market. With a view to infuse globally acceptable
best practices, modern management skills and latest technology, it
was decided to allow foreign investment in Commodity Exchanges.

(2) For the purposes of this chapter/article,

(i) Commodity Exchange is a recognised
association
under the provisions of the Forward Contracts (Regulation) Act, 1952,
as amended from time to time, to provide exchange platform for
trading in forward contracts in commodities.

(ii) Recognised association means an association to which
recognition for the time being has been granted by the Central
Government under Section 6 of the Forward Contracts (Regulation) Act,
1952

(iii) Association means any body of individuals, whether
incorporated or not, constituted for the purposes of regulating and
controlling the business of the sale or purchase of any goods and
commodity derivative.

(iv) Forward contract means a contract
for the
delivery of goods and which is not a ready delivery contract.

(v) Commodity derivative means-

(a) A contract for delivery of goods, which is not a ready
delivery contract; or

(b) A contract for differences which
derives its
value from prices or indices of prices of such underlying goods or
activities, services, rights, interests and events, as may be
notified in consultation with the Forward Markets Commission by the
Central Government, but does not include securities.

FDI in commodity exchanges is allowed
up to 49% (FDI
& FII) [Investment by Registered FII under Portfolio Investment
Scheme (PIS) will be limited to 23% and Investment under FDI Scheme
limited to 26% ] through government approval route (FDI).

The other conditions in this regard are as follow:

(i) FII purchases shall be restricted to secondary market only
and

(ii) No non-resident investor/ entity,
including
persons acting in concert, will hold more than 5% of the equity in
these companies.

FDI in private banking sector of India
is allowed up
to 74% where FDI up to 49% is allowed through automatic route and FDI
beyond 49% but up to 74% is allowed through government approval
route.

These conditions must also be satisfied in this regard:

(1) This 74% limit will include
investment under the
Portfolio Investment Scheme (PIS) by FIIs, NRIs and shares acquired
prior to September 16, 2003 by erstwhile OCBs, and continue to
include IPOs, Private placements, GDR/ADRs and acquisition of shares
from existing shareholders.

(2) The aggregate foreign investment in a private bank from
all
sources will be allowed up to a maximum of 74 per cent of the paid up
capital of the Bank. At all times, at least 26 per cent of the paid
up capital will have to be held by residents, except in regard to a
wholly-owned subsidiary of a foreign bank.

(3) The stipulations as above will be applicable to all
investments in existing private sector banks also.

(4) The permissible limits under portfolio investment schemes
through stock exchanges for FIIs and NRIs will be as follows:

(i) In the case of FIIs, as hitherto,
individual FII
holding is restricted to 10 per cent of the total paid-up capital,
aggregate limit for all FIIs cannot exceed 24 per cent of the total
paid-up capital, which can be raised to 49 per cent of the total
paid-up capital by the bank concerned through a resolution by its
Board of Directors followed by a special resolution to that effect by
its General Body.

(a) Thus, the FII investment limit will
continue to
be within 49 per cent of the total paid-up capital.

(b) In the case of NRIs, as hitherto,
individual
holding is restricted to 5 per cent of the total paid-up capital both
on repatriation and non-repatriation basis and aggregate limit cannot
exceed 10 per cent of the total paid-up capital both on repatriation
and non-repatriation basis. However, NRI holding can be allowed up to
24 per cent of the total paid-up capital both on repatriation and
non-repatriation basis provided the banking company passes a special
resolution to that effect in the General Body.

(c) Applications for foreign direct
investment in
private banks having joint venture/subsidiary in insurance sector may
be addressed to the Reserve Bank of India (RBI) for consideration in
consultation with the Insurance Regulatory and Development Authority
(IRDA) in order to ensure that the 26 per cent limit of foreign
shareholding applicable for the insurance sector is not being
breached.

(d) Transfer of shares under FDI from residents to
non-residents
will continue to require approval of RBI and Government as per para
3.6.2 above as applicable.

(e) The policies and procedures
prescribed from time
to time by RBI and other institutions such as SEBI, D/o Company
Affairs and IRDA on these matters will continue to apply.

(f) RBI guidelines relating to
acquisition by
purchase or otherwise of shares of a private bank, if such
acquisition results in any person owning or controlling 5 per cent or
more of the paid up capital of the private bank will apply to
non-resident investors as well.

(ii) Setting up of a subsidiary by foreign banks

(a) Foreign banks will be permitted to either have branches or
subsidiaries but not both.

(b) Foreign banks regulated by banking
supervisory
authority in the home country and meeting Reserve Bank‘s licensing
criteria will be allowed to hold 100 per cent paid up capital to
enable them to set up a wholly-owned subsidiary in India.

(c) A foreign bank may operate in India
through only
one of the three channels viz., (i) branches (ii) a wholly-owned
subsidiary and (iii) a subsidiary with aggregate foreign investment
up to a maximum of 74 per cent in a private bank.

(d) A foreign bank will be permitted to
establish a
wholly-owned subsidiary either through conversion of existing
branches into a subsidiary or through a fresh banking license. A
foreign bank will be permitted to establish a subsidiary through
acquisition of shares of an existing private sector bank provided at
least 26 per cent of the paid capital of the private sector bank is
held by residents at all times consistent with para (i) (b) above.

(e) A subsidiary of a foreign bank will
be subject
to the licensing requirements and conditions broadly consistent with
those for new private sector banks.

(f) Guidelines for setting up a
wholly-owned
subsidiary of a foreign bank will be issued separately by RBI.

(g) All applications by a foreign bank
for setting
up a subsidiary or for conversion of their existing branches to
subsidiary in India will have to be made to the RBI.

(iii) At present there is a limit of
ten per cent on
voting rights in respect of banking companies, and this should be
noted by potential investor. Any change in the ceiling can be brought
about only after final policy decisions and appropriate Parliamentary
approvals.

FDI in public banking sector of India
is allowed up
to 20% (FDI and Portfolio Investment) through government approval
route subject to Banking Companies (Acquisition and Transfer of
Undertakings) Acts 1970/80. This ceiling (20%) is also applicable to
the State Bank of India and its associate Banks.

Foreign investment in other financial
services,
other than those discussed in the present and subsequent articles
would require prior approval of the Government. For the purposes of
FDI, Asset Reconstruction Company (ARC) means a company registered
with the Reserve Bank of India (RBI) under Section 3 of the
Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (SARFAESI Act).

FDI in ARC is allowed up to 49% of
paid-up capital
of ARC through government approval route.

The following other conditions must be satisfied in this
regard:

(i) Persons resident outside India,
other than
Foreign Institutional Investors (FIIs), can invest in the capital of
Asset Reconstruction Companies (ARCs) registered with Reserve Bank
only under the Government Route. Such investments have to be strictly
in the nature of FDI. Investments by FIIs are not permitted in the
equity capital of ARCs.

(ii) However, FIIs registered with SEBI
can invest
in the Security Receipts (SRs) issued by ARCs registered with Reserve
Bank. FIIs can invest up to 49 per cent of each tranche of scheme of
SRs, subject to the condition that investment by a single FII in each
tranche of SRs shall not exceed 10 per cent of the issue.

(iii) Any individual investment of more
than 10%
would be subject to provisions of section 3(3) (f) of Securitization
and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002.

The Plaintiff in this case argued that
as an India
citizen he had a right to privacy under the Indian Constitution and
that the defendants could not violate his right. The order was passed
ex-parte against an American law firm and Google’s e-mail id that
sent the communication pertaining to US court’s order.

Interestingly, the litigation before
the
US/California court pertains to a dispute between two other parties
and it appears that Plaintiff’s Gmail id may hold evidence relevant
to resolve dispute between these parties. The normal practice to seek
evidence in these cases is to issue “letters rogatory”, under the
Hague
Convention on Taking of Evidence Abroad in Civil or Commercial
Matters requesting the India to assist in the
collection
of evidence. Such letters rogatory can be enforced, in India, only by
High Courts, as per the Code of Civil Procedure, 1908.

It seems the US court did not consider
it necessary
to adopt that procedure. This may be so because Google is a US based
company over which US courts have primary jurisdiction. In fact, the
terms of service of Google clearly stipulates that all Gmail users
consent to be governed by the laws of the U.S. Google’s operation
is global in nature and it is required to comply with the laws of
various jurisdictions, including India.

To confer jurisdiction upon Indian
courts, the
Plaintiff argued that the cause of action in the present suit arose
in India when the Plaintiff created his Gmail id account in
Vishakhapatnam and also when he received the legal notice in
Vishakhapatnam. Let us see how the case would proceed in this regard.

Cash
and Carry wholesale
trading/Wholesale trading would mean sale of goods/merchandise to
retailers,
industrial, commercial, institutional or other professional business
users or
to other wholesalers and related subordinated service providers.
Wholesale
trading would, accordingly, be sales for the purpose of trade, business
and
profession, as opposed to sales for the purpose of personal
consumption. The
yardstick to determine whether the sale is wholesale or not would be
the type
of customers to whom the sale is made and not the size and volume of
sales.
Wholesale trading would include resale, processing and thereafter sale,
bulk
imports with ex-port/ex-bonded warehouse business sales and B2B
e-Commerce.

The
following Guidelines for Cash
and Carry Wholesale Trading/Wholesale Trading (WT) would apply:

(a)
For undertaking WT, requisite
licenses/registration/ permits, as specified under the relevant
Acts/Regulations/Rules/Orders of the State Government/Government
Body/Government Authority/Local Self-Government Body under that State
Government should be obtained.

(b)
Except in case of sales to
Government, sales made by the wholesaler would be considered as cash
and carry
wholesale trading/wholesale trading with valid business customers, only
when WT
are made to the following entities:

(ii)
Entities holding trade
licenses i.e. a license/registration certificate/membership
certificate/registration under Shops and Establishment Act, issued by a
Government Authority/ Government Body/ Local Self-Government Authority,
reflecting
that the entity/person holding the license/ registration certificate/
membership certificate, as the case may be, is itself/ himself/herself
engaged
in a business involving commercial activity; or

(iii)
Entities holding
permits/license etc. for undertaking retail trade (like tehbazari and
similar
license for hawkers) from Government Authorities/Local Self Government
Bodies;
or

(iv)
Institutions having
certificate of incorporation or registration as a society or
registration as
public trust for their self consumption.

An Entity, to whom WT is made, may
fulfill any one of the 4
conditions.

(c)
Full records indicating all
the details of such sales like name of entity, kind of entity,
registration/license/permit etc. number, amount of sale etc. should be
maintained on a day to day basis.

(d)
WT of goods would be
permitted among companies of the same group. However, such WT to group
companies taken together should not exceed 25% of the total turnover of
the
wholesale venture

(e)
WT can be undertaken as per
normal business practice, including extending credit facilities subject
to
applicable regulations.

(f)
A Wholesale/Cash and carry
trader cannot open retail shops to sell to the consumer directly.

FDI
in E-commerce activities is
allowed upto 100% through Automatic route. E-commerce activities refer
to the
activity of buying and selling by a company through the e-commerce
platform.
Such companies would engage only in Business to Business (B2B)
e-commerce and
not in retail trading, inter-alia implying that existing restrictions
on FDI in
domestic trading would be applicable to e-commerce as well.

FDI
in test marketing of such
items for which a company has approval for manufacture is allowed upto
100%
through government approval route, provided such test marketing
facility will
be for a period of two years, and investment in setting up
manufacturing
facility commences simultaneously with test marketing.

FDI
in Single Brand product
retail trading is allowed upto 100% through government approval route.
For this
purpose:

(1)
Foreign Investment in Single
Brand product retail trading is aimed at attracting investments in
production
and marketing, improving the availability of such goods for the
consumer,
encouraging increased sourcing of goods from India,
and enhancing competitiveness of Indian enterprises through access to
global
designs, technologies and management practices.

(2)
FDI in Single Brand product
retail trading would be subject to the following conditions:

(a) Products to be sold should be of
a Single Brand only.

(b)
Products should be sold under
the same brand internationally i.e. products should be sold under the
same
brand in one or more countries other than India.

(c)
Single Brand product-retail
trading would cover only products which are branded during
manufacturing.

(d) The foreign investor should be
the owner of the brand.

(e)
In respect of proposals
involving FDI beyond 51%, mandatory sourcing of at least 30% of the
value of
products sold would have to be done from Indian small industries/
village and
cottage industries, artisans and craftsmen‘. 'Small industries' would
be
defined as industries which have a total investment in plant and
machinery not
exceeding US $ 1.00 million. This valuation refers to the value at the
time of
installation, without providing for depreciation. Further, if at any
point in
time, this valuation is exceeded, the industry shall not qualify as a
'small
industry' for this purpose. The compliance of this condition will be
ensured
through self-certification by the company, to be subsequently checked,
by
statutory auditors, from the duly certified accounts, which the company
will be
required to maintain.

(3)
Application seeking
permission of the Government for FDI in retail trade of Single Brand
products
would be made to the Secretariat for Industrial Assistance (SIA) in the
Department of Industrial Policy and Promotion. The application would
specifically indicate the product/ product categories which are
proposed to be
sold under a Single Brand. Any addition to the product/ product
categories to
be sold under Single Brand would require a fresh approval of the
Government.

(4)
Applications would be
processed in the Department of Industrial Policy and Promotion, to
determine
whether the products proposed to be sold satisfy the notified
guidelines,
before being considered by the FIPB for Government approval.

In this article Perry4Law and Perry4Law Techno Legal Base (PTLB) would discuss the FDI limits in telecom services, ISPs and telecom infrastructure providing sectors of India under consolidated FDI policy of India 2012.

Telecom service providers, ISPs and telecom infrastructure providers must comply with licensing and security requirements notified by the Department of Telecommunications for all services in order to make FDI in India.

FDI in telecom services is allowed upto 74% where upto 49% FDI can be made through automatic route and beyond 49% but upto 74%, FDI can be made through government approval route.

(ii) Both direct and indirect foreign investment in the licensee company shall be counted for the purpose of FDI ceiling. Foreign Investment shall include investment by Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and convertible preference shares held by foreign entity. In any case, the Indian shareholding will not be less than 26 percent.

(iii) FDI in the licensee company/Indian promoters/investment companies including their holding companies shall require approval of the Foreign Investment Promotion Board (FIPB) if it has a bearing on the overall ceiling of 74 percent. While approving the investment proposals, FIPB shall take note that investment is not coming from countries of concern and/or unfriendly entities.

(iv) The investment approval by FIPB shall envisage the conditionality that Company would adhere to licence Agreement.

(v) FDI shall be subject to laws of India and not the laws of the foreign country/countries.

(2) Security Conditions:

(i) The Chief Officer In-charge of technical network operations and the Chief Security Officer should be a resident Indian citizen.

(ii) Details of infrastructure/network diagram (technical details of the network) could be provided on a need basis only to telecom equipment suppliers/manufacturers and the affiliate/parents of the licensee company. Clearance from the licensor (Department of Telecommunications) would be required if such information is to be provided to anybody else.

(iii) For security reasons, domestic traffic of such entities as may be identified /specified by the licensor shall not be hauled/routed to any place outside India.

(iv) The licensee company shall take adequate and timely measures to ensure that the information transacted through a network by the subscribers is secure and protected.

(v) The officers/officials of the licensee companies dealing with the lawful interception of messages will be resident Indian citizens.

(vi) The majority Directors on the Board of the company shall be Indian citizens. Recently, the Home Ministry of India blocked Telenor’s FIPB application on certain grounds, including absence of resident directors, and this condition has made the license conditions even more stringent.

(vii) The positions of the Chairman, Managing Director, Chief Executive Officer (CEO) and/or Chief Financial Officer (CFO), if held by foreign nationals, would require to be security vetted by Ministry of Home Affairs (MHA). Security vetting shall be required periodically on yearly basis. In case something adverse is found during the security vetting, the direction of MHA shall be binding on the licensee.

(viii) The Company shall not transfer the following to any person/place outside India:-

(a) Any accounting information relating to subscriber (except for international roaming/billing) (Note: it does not restrict a statutorily required disclosure of financial nature); and

(ix) The Company must provide traceable identity of their subscribers. However, in case of providing service to roaming subscriber of foreign Companies, the Indian Company shall endeavour to obtain traceable identity of roaming subscribers from the foreign company as a part of its roaming agreement.

(x) On request of the licensor or any other agency authorised by the licensor, the telecom service provider should be able to provide the geographical location of any subscriber (BTS location) at a given point of time.

(xi) The Remote Access (RA) to Network would be provided only to approved location(s) abroad through approved location(s) in India. The approval for location(s) would be given by the Licensor (DOT) in consultation with the Ministry of Home Affairs.

(xii) Under no circumstances, should any RA to the suppliers/manufacturers and affiliate(s) be enabled to access Lawful Interception System(LIS), Lawful Interception Monitoring(LIM), Call contents of the traffic and any such sensitive sector/data, which the licensor may notify from time to time.

(xiii) The licensee company is not allowed to use remote access facility for monitoring of content.

(xiv) Suitable technical device should be made available at Indian end to the designated security agency /licensor in which a mirror image of the remote access information is available on line for monitoring purposes.

(xv) Complete audit trail of the remote access activities pertaining to the network operated in India should be maintained for a period of six months and provided on request to the licensor or any other agency authorised by the licensor.

(xvi) The telecom service providers should ensure that necessary provision (hardware/software) is available in their equipment for doing the Lawful interception and monitoring from a centralized location.

(xvii) The telecom service providers should familiarize/train Vigilance Technical Monitoring (VTM)/security agency officers/officials in respect of relevant operations/features of their systems.

(xviii) It shall be open to the licensor to restrict the Licensee Company from operating in any sensitive area from the National Security angle.

(xix) In order to maintain the privacy of voice and data, monitoring shall only be upon authorisation by the Union Home Secretary or Home Secretaries of the States/Union Territories.

(xx) For monitoring traffic, the licensee company shall provide access of their network and other facilities as well as to books of accounts to the security agencies.

(xxi) The aforesaid Security Conditions shall be applicable to all the licensee companies operating telecom services covered under this circular irrespective of the level of FDI.

(xxii) Other Service Providers (OSPs), providing services like Call Centres, Business Process Outsourcing (BPO), tele-marketing, tele-education, etc, and are registered with DoT as OSP. Such OSPs operate the service using the telecom infrastructure provided by licensed telecom service providers and 100% FDI is permitted for OSPs. As the security conditions are applicable to all licensed telecom service providers, the security conditions mentioned above shall not be separately enforced on OSPs.

(3) The above General Conditions and Security Conditions shall also be applicable to the companies operating telecom service(s) with the FDI cap of 49%.

(4) All the telecom service providers shall submit a compliance report on the aforesaid conditions to the licensor on 1st day of July and January on six monthly basis.

(a) FDI in ISP with gateways is allowed upto 74% where FDI upto 49% would be through automatic route and FDI beyond 49% but upto 74% would be through government approval route.

(b) FDI in ISP‘s not providing gateways i.e. without gate-ways (both for satellite and marine cables) would be allowed upto 74% where FDI upto 49% would be through automatic route and FDI beyond 49% but upto 74% would be through government approval route.

The new guidelines of August 24, 2007 Department of Telecommunications provide for new ISP licenses with FDI up to 74%.

(c) Radio paging

(d) End-to-End bandwidth

(a) FDI for infrastructure providers providing dark fiber, right of way, duct space, tower (IP Category I) is allowed upto 100% where FDI upto 49% would be through automatic route and FDI beyond 49% shall be through government approval route.

(b) Electronic Mail

(c) Voice Mail

Investment in all the above activities is subject to the conditions that such companies will divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world.

18 Apr 2012

The recent Vodafone tax case has become a bone of contention between Vodafone and Indian government. Vodafone has been maintaining that imposing a retrospective taxation liability upon it would be counter productive for the foreign direct investment (FDI) in India.

In the latest development in Vodafone taxation issue, Vodafone has served a notice on the Indian government on its proposal to impose a retrospective tax liability. The notice has been served upon the Prime Minister's Office, Finance Minister, Law and Justice and Communications and IT Ministries as well.

The notice alleges that the proposed Finance Bill, 2012, with its retrospective nature, violates international legal protections granted to international investors. The notice has been served by Vodafone's Dutch subsidiary and is the first step required prior to commencement of international arbitration under the Bilateral Investment Treaty (BIT) between India and the Netherlands.

Vodafone has been contending that under the treaty the Indian government is liable to accord fair and equitable treatment to investors, provide security, not breach the legitimate expectations of investors in making investments and not deny justice or breach previously provided assurances. Let us see how Indian government would react to the same.

(1) Penetration of banking services in rural areas has been a major area of concern to the Government. The Government has been considering leveraging the growth of mobile service in rural areas to provide basic financial services to unbanked citizens of the country by riding on mobile infrastructure. An Inter Ministerial Group (IMG) was constituted on 19.11.2009 by the Cabinet Secretariat to workout relevant norms and modalities for introduction of a mobile based delivery model for delivery of basic financial services and to enable finalization of a framework to allow financial transactions using mobile phones. The report and recommendations of the IMG were examined by a Committee of Secretaries and accepted by the Government. The proposed system envisages sharing of the following elements:

(a) A simplified common template for the KYC requirements for the Mobile linked No-Frills Accounts which is acceptable to all service providers.

(c) An Account Mapper that provides linkages between Unique Identification Number, mobile number and the mobile linked nofrills account details. Real-Time Micro Transactions (REMIT) connects to the Account Mapper to obtain details pertaining to a specific customer after he has been authenticated.

(d) An interoperable central payments switch, called REMIT Switch, that will facilitate real time transaction routing across Banking Correspondents (BCs), Banks (or associated Financial Institutions and outsourcing partners of Banks), Unique Identification Authority of India, Account Mapper and mobile service providers. INFAST (Interoperable Infrastructure for Accounting Small Transactions) can be created as an additional infrastructure for creating and managing mobile linked no-frills accounts.

(e) The IMG framework based on mobile phones and biometric-based authentication will form the core micro-payment platform for transfer of benefits under various government schemes, micropayment services and financial inclusion for the target groups of social sector programmes.

(2) The IMG has, inter-alia recommended that TRAI may also draw up guidelines to ensure high availability of associated communication services. Mobile banking consists of banking transactions and the use of mobile networks for communicating through mobile phones by the customer for such transactions. The entire transaction depends on the capability of the mobile network to deliver a fast, reliable and cost effective method of communication with inbuilt audit trails and desired levels of security for transmission. These aspects were addressed through a consultation process by TRAI by issuing a Consultation Paper on 28th October 2010 seeking the views of stakeholders by 15th December 2010 to identify QoS parameters to meet such requirements. An Open House Discussion was held at Mumbai on 23rd March, 2011 and based on the stakeholders comments and study of the system, the Quality of Service for various parameters forming part of the mobile communication has been prescribed in these regulations.

(3) The modes for delivery of messages for mobile banking: During consultation process, most of the stakeholders opined that SMS (Short Messaging Service), IVR (Interactive Voice Response), WAP (Wireless Access Protocol) platform can be used across both CDMA and GSM and methods like JAVA/ BREW applications and STK may also be preferred. It is seen that various modes of communication that can be used for mobile financial transactions offer different functionality and has its own merits. Some of the methods of communication may not be suitable for low-end handsets. The Authority felt that, considering the ease of use and availability across all the mobile handsets, SMS, USSD and IVR need to be mandated. The Authority also felt that WAP and STK could be optionally allowed for such communications. Accordingly, provisions have been made in the regulations. The Authority may also prescribe, from time to time, any other methods of communications.

(4) Being a financial transaction the consumer would like to receive confirmation of the outcome of the transaction at the earliest. In the case of SMS, there could be a possibility that the SMS is not delivered due to customer related issues or network related issues. To address this issue it has also been mandated that in such cases an USSD communication is also sent to the customer confirming the completion of transaction. Wherever the network permits, the service provider, through mutual agreement with the bank, should implement such a system where the confirmation message shall be sent with a request for delivery report confirmation to Access Provider’s SMSC. Access Provider’s SMSC will try to deliver such messages immediately within the time limit prescribed in these regulations and inform back the delivery status with proper error code towards application hosted at the backend. In case the SMS delivery fails, the error code received from the SMSC can be used by the system in the backend to trigger an USSD towards the customer. Considering the fact that USSD messages cannot be stored, it has also been provided in the regulations that the expiry time for SMS will be a minimum of seventy two hours.

(5) The time frame for delivery of messages for mobile banking: Most of the stakeholders had suggested different time frames for different methods of communication. After considering various suggestions in this regard, the Authority decided the time frame for delivery of the messages for mobile banking transaction. Measurement methodology for the time frame for delivery of the messages generated by the customer or the bank relating to banking services provided to the customers are prescribed in Schedule-I. These time frames are for the first delivery attempt.

(6) QOS parameters: During consultation process most of the stakeholders agreed with the present quality of service parameter for the network which are already prescribed by the TRAI in accordance with Standards Of Quality Of Service Of Basic Service( Wireline) and Cellular Mobile Telephone Services, Regulation, 2009. The Authority considered the matter and felt that the quality of service standards already laid down by the Authority would be sufficient to address network related quality of service parameters. However, for protecting the interest of consumers the Authority has prescribed the following three Customer Centric parameters:

(a) Time taken to deliver error and success confirmation message: This parameter signifies the efficiency in the delivery of error and success confirmation messages. As per this parameter the error messages and successful confirmation messages sent by the banking system based on customer action shall be delivered to the customer within 2 minutes. The regulations further provide that in case a message generated by the customer or the bank cannot be delivered due to any reason the access provider shall immediately send an error message intimating the non-completion of the process to the customer or the bank, as the case may be.

(b) Transaction update on the system: Any message triggered through a consumer action for mobile banking services shall be updated in the system for any transaction on a real time basis.

(c) Success of delivery of financial transaction messages: This parameter signifies the efficiency in the successful delivery of financial transaction message.

(7) Periodical reporting system: The regulations provide for periodical reporting of performance of service providers against the quality of service benchmarks prescribed in these regulations in such format and at such interval as may be prescribed by the Authority.

(8) Security requirements: During consultation process, all the stakeholders opined that security is a critical issue. The most important security components are stated to be Authenticity and authorization, Integrity, Non-repudiation, and Confidentiality. The GSM/CDMA system architecture takes care of End to End Encryption, Authentication, Authorization, Integrity and Non-repudiation, which are governed by international standard bodies.

(9) Accordingly, the Authority has prescribed in these regulations that the confidentiality of end to end encryption, integrity, authentication and non-repudiation of communication shall be in accordance with the standards certified by ITU/ETSI/TEC/ International standardization bodies such as 3GPP/3GPP2/IETF/ANSI/TIA/IS or any other international standard as may be approved by the Central Government.

Mobile banking is increasingly being explored in India for online payment purposes. Realising the importance of this issue, the Telecom Regulatory Authority of India (TRAI) has issued regulations in this regard through Notification No. 305-27/2011-QoS, dated 17th April, 2012.

The same are known as Mobile Banking (Quality of Service) Regulations, 2012 and they have been issued by TRAI in exercise of the powers conferred by section 36 read with sub-clauses (i) and (v) of clause (b) of sub-section (1) of section 11 of the Telecom Regulatory Authority of India Act, 1997 (24 of 1997). They shall come into force from the date of their publication in the Official Gazette.

2. Definitions.― In these regulations, unless the context otherwise requires,-

(a) “Access Providers” includes the Basic Telephone Service Provider, Cellular Mobile Telephone Service Provider and Unified Access Service Provider;

(c) “Authority” means the Telecom Regulatory Authority of India established under sub section (1) of section 3 of the Act;

(d) “Banking services” means the services provided by the bank to its customer;

(e) “Cellular Mobile Telephone Service”,--

(i) Means telecommunication service provided by means of a telecommunication system for the conveyance of messages through the agency of wireless telegraphy where every message that is conveyed thereby has been, or is to be, conveyed by means of a telecommunication system which is designed or adapted to be capable of being used while in motion;

(ii) Refers to transmission of voice or non-voice messages over Licensee’s Network in real time only but service does not cover broadcasting of any messages, voice or non-voice, however, Cell Broadcast is permitted only to the subscribers of the service;

(iii) In respect of which the subscriber (all types, pre-paid as well as post-paid) has to be registered and authenticated at the network point of registration and approved numbering plan shall be applicable;

(iv) Includes both Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA) Technology;

(f) “Cellular Mobile Telephone Service Provider” means a licensee authorized to provide Cellular Mobile Telephone Service under a licence granted under section 4 of the Indian Telegraph Act, 1885 (13 of 1885), in a specified service area;

(g) “Customer” means a customer of a service provider to whom these regulations apply and includes its consumer and subscriber;

(h) “IVR” or “Interactive Voice Response” means a technology that allows a computer to interact with a person through the use of voice and Dual Tone Multi Frequency keypad inputs;

(l) “SMS” means a message which is sent through short message service and includes a Multimedia Message which is sent through Multimedia Message Service (MMS);

(m) “STK” or “SIM Application Tool Kit” means a standard of GSM system which enables SIM to initiate actions which can be used for various value added services;

(n) “Subscriber” means a person or legal entity who subscribes to telecom service provided by an Access Provider;

(o) “Unified Access Services”, --

(i) Means telecommunication service provided by means of a telecommunication system for the conveyance of messages through the agency of wired or wireless telegraphy;

(ii) Refers to transmission of voice or non-voice messages over licensee’s network in real time only but service does not cover broadcasting of any messages, voice or non-voice, however, Cell Broadcast is permitted only to the subscribers of the service;

(iii) In respect of which the subscriber (all types, pre-paid as well as post-paid) has to be registered and authenticated at the network point of registration and approved numbering plan shall be applicable;

(p) “Unified Access Service Provider” means a licensee authorised to provide Unified Access Services under a licence granted under section 4 of the Indian Telegraph Act,1885(13 of 1885), in a specified service area;

(r) “WAP” or “Wireless Application Protocol” means an open protocol for wireless multimedia messaging;(s) All other words and expressions used in these regulations but not defined, and defined in the Indian Telegraph Act, 1885 (13 of 1885) and the Telecom Regulatory Authority of India Act 1997 (24 of 1997) and the rules and other regulations made thereunder, shall have the meanings respectively assigned to them in those Acts or the rules or such other regulations, as the case may be.

3. Mode and Time frame for delivery of message for mobile banking. ―

(1) Every Access Provider, acting as bearer, shall facilitate the banks to use SMS, USSD and IVR to provide banking services to its customers and deliver the message generated by the bank or the customer within the time frame specified in sub-regulation (5).

(2) Every Access provider shall ensure that in case SMS is used for mobile banking transaction, a report confirming the delivery of the message is sent to the customer or the bank, as the case may be:

Provided that every service provider shall, establish, if network permits, through mutual agreement with the bank, a system to ensure that if SMS sent by the bank is not delivered to the customer, the system shall trigger USSD communication to the customer confirming the completion of the transaction.

(3) An Access Provider may allow the bank to use WAP or STK to provide banking services to its customers and shall comply with the time frame for delivery of the messages generated by the customer or the bank specified in sub-regulation (5):

Provided that the Authority may, from time to time, specify any other means of communication and its quality of service parameter for delivery of message.

(4) Every Access provider shall ensure that for availing the banking services such as cash deposit, cash withdrawal, money transfer and balance enquiry, the customer is able to complete the transaction in not more than two stage transmission of message in the case of SMS or not more than two stage entry of options in the case of USSD and IVR.

(5) Every Access Provider shall meet the following time frame for delivery of the messages generated by the customer or the bank relating to banking services provided to the customers, namely:-

Provided further that in the case of an USSD communication triggered by the system referred to in sub-regulation (2), the time frame shall start from the time USSD is triggered by the system.

(6) Every Access Provider shall ensure that if SMS is used for mobile transaction the SMS, sent by the bank, shall be sent as transactional messages through separate telecom resources, as provided in the Telecom Commercial Communications Customer Preference Regulations, 2010 (6 of 2010) dated 1st December, 2010.

(7) The measurement methodology in respect of the means of communication provided in sub-regulation (5) is specified in the Schedule-I.

(8) Every Access Provider shall ensure that the equipments installed in its network are capable of delivering messages within the time frame fixed under sub-regulation (5).

4. Quality of service parameters for m-banking communication. ― (1) The Network Service Quality Parameters for Cellular Mobile Telephone Services as specified in the Standards of Quality of Service of Basic Telephone Service (Wireline) and Cellular Mobile Telephone Service Regulations, 2009 (7 of 2009) shall apply to all m-banking messages.

(2) Every Access Provider shall meet the following customer centric quality of service parameters, namely:-

1. Time taken to deliver error and success confirmation message- 99.5 % within 2 minutes.

2. Transaction update on the system- 100 %

3. Success of delivery of financial transaction messages- 99.5 %

(3) Every Access Provider shall measure its quality of service in respect of each parameter against their benchmark in accordance with the measurement methodology specified in the Schedule-II.

5. Security requirements for m-banking communication. ― (1) Every Access Provider shall protect privacy and security of m-banking communication and ensure the confidentiality of end-to-end encryption, integrity, authentication and non-repudiation of such communication.

(2) The end-to-end encryption, integrity, authentication and non-repudiation of m-banking communication in the network of the Access Provider shall be in accordance with the standards certified by International Telecommunication Union (ITU) or European Telecommunications Standards Institute (ETSI) or Telecommunication Engineering Centre (TEC) or International standardization bodies such as Third Generation Partnership Project (3GPP) or Third Generation Partnership Project 2 (3GPP2) or Internet Engineering Task Force (IETF) or American National Standards Institute (ANSI) or Telecommunications Industry Association (TIA) or Interim Standard (IS) or any other international standard as may be approved by the Central Government.

6. Reporting. ―Every Access provider shall submit to the Authority its compliance reports of benchmarks in respect of each Quality of Service parameter specified under sub regulation (5) of regulation 3 and sub regulation (2) of regulation 4 in such manner and such format, at such intervals and within such time limit, as may be specified by the Authority by an order or direction.

7. Obligation of the Access Providers. ― (1) Every Access Provider shall maintain record of mobile banking messages for six months for audit purposes.

(2) In case the message generated by the customer or the bank, in the process of m-banking transaction is not delivered due to any reason, the Access Provider shall immediately send an error message intimating the non completion of the process to the customer or the bank, as the case may be.

(3) Every Access Provider shall maintain records of every m-banking communication in compliance of time frame for delivery of the messages specified in regulation 3 and benchmark of each of the quality of service parameters specified in regulation 4, in such manner and in such format, as may be specified by direction, by the Authority, from time to time.

(4) The Authority may, if it considers expedient so to do, and to ensure compliance of the provisions of these regulations, at any time, direct any of its officers or employee or any agency appointed by the Authority in this behalf, to inspect the records maintained under sub-regulations (1), (2) and (3).

(5) Every Access Provider shall maintain complete and accurate record of the consumers, using banking service through mobile phones.

8. Interpretation. ― In case of any doubt regarding interpretation of any of the provisions of these regulations, the clarifications issued by the Authority in this regard, shall be final and binding.

In the past, India rejected the ratification of an international arbitration clause in its free trade agreement with the European Union. Some considered it as objectionable yet we believe that such a precaution is a must in the current scenario of uncertainties and global economic slowdowns.

Those who opposed such a move on the part of India believe that it is not an encouraging sign for foreign investments in India. They believe that foreign investors will have a fear factor while doing business with India.

The Indian government has recently released the consolidated FDI policy of India 2012. It is a combination of liberalisation, automation and government regulations. So the FDI environment of India is clear and unambiguous in nature.

The recent Vodafone tax case has raised many crucial questions regarding FDI in India, taxation regime of India, governmental policies, arbitration mandates, etc. Even Vodafone has served a notice upon Indian government declaring its intentions to start an international arbitration if retrospective tax liability is imposed upon it.

India has a tendency to take action only on eleventh hour when things are already in bad shape. This is the reason why 2G scams, Vodafone tax controversy, inadequate technology statues, etc are haunting Indian government now. For some strange reason India has always preferred a knee jerk reaction instead of a well defines policy environment with transparency and accountability.

In the present circumstances refusing to approve an arbitration clause in various free trade agreements and FDI treaties is natural. India cannot afford the agitation of various disputes at international level till it makes its own turf clear and strong.

Dispute resolution of matters pertaining to national issues and foreign relations is a sovereign function that India cannot allow to be taken away. If arbitration disputes are directly taken to international platforms/institutions this would undermine the very sovereignty of India. This fact must be clearly mentioned in the FDI policies of India and other such trade agreements.

However, in order to do so, India must make its dispute resolution machinery effective and litigant friendly. Some believe that the present dispute resolution mechanisms of India, whether courts or arbitration, are in a very poor state of condition. Technological innovations like e-courts and online dispute resolution (ODR) are seldom used in India. They must be frequently used by India.

The arbitration law of India is outdated and needs urgent amendment. If India is really serious about FDI it must improve the business doing environment and effective dispute resolution policy. But allowing disputes to be taken to international institutions is the last option that India must exercise even if it means loosing the valuable FDI.

In the ultimate analysis, if there is a choice between sovereignty and FDI/FTA, all countries would choose the former. So we have to invent a formula that does not touch either. This can be done by improving the decaying legal, arbitration and judicial system of India rather than allowing the matters to be taken out of India for settlement.